By Lowtax Editorial
12 May, 2015
Bermuda is one of the most prominent of the international offshore financial centers, with particularly strong insurance, investment fund and trusts sectors, and with a very well-developed advisory and financial infrastructure. The jurisdiction is the subject of this special focus.
Where is Bermuda?
Bermuda is a mid-Atlantic archipelago 1,000 km from the USA. Contrary to what many people think, Bermuda isn't in the Caribbean, which is 1,500km to the south!
Bermuda Standard Time is 1 hour ahead of US Eastern Time, and 4 hours behind GMT.
Bermuda Is Self-Governing, But Not Independent
Bermuda is a self-governing British Crown Colony and forms part of the Commonwealth. Its legal system is based on English common law. The Crown appoints the Governor and Britain is responsible for the Island's external affairs, defense, internal security and the police. Bermuda has an elected House of Assembly and an appointed Upper House.
In a 1995 vote, the island's population rejected a proposal to become independent, partly perhaps out of concern for Bermuda's highly successful financial services industry. However, agitation for independence continues.
Bermuda's Population Is Rising
Since 1950 the resident civilian population has steadily increased to just fewer than 70,000 people (according to a July 2014 estimate) of mostly English, Portuguese and West Indian descent.
The Bermudan economy has been highly successful, with tourism and international business being the two main sources of revenue. However, the economy has struggled since the global financial crisis; the economy contracted by 3.5 percent in 2011 and has been in negative territory ever since.
Nevertheless, Bermuda remains relatively wealthy. Bermuda's GDP in 2011 was an estimated USD5.6bn, giving a GDP per head of more than USD86,000.
The development of Bermuda's thriving financial sector began in the 1950s. A wide variety of financial services are represented, with the captive insurance sector being the world leader; fund and trust management are also prominent. Supervision of the financial sector is in the hands of the Bermuda Monetary Authority (BMA), an independent agency which inherited regulatory and supervisory powers from the Government.
The unit of currency is the Bermuda dollar (BMD) which has parity against the US dollar. However, the US dollar is also accepted.
Certain exchange controls apply to Bermudian citizens and to "local" companies, but there are no capital or exchange controls applying to non-residents or to offshore entities.
Bermuda Is A Low Tax Jurisdiction
In Bermuda there are no taxes on profits, dividends or income (personal and corporate); there is no capital gains tax, no withholding tax and no sales tax.
The main tax impinging on companies is payroll tax. In 2015, the rates vary from 5.5 percent to 14.5 percent, depending on the level of the company's total payroll.
Bermudan employers must pay social insurance contributions in respect of every employee over 16 years old, and who works more than 4 hours per week; half of the amount paid may be deducted from the employee's pay.
There are also taxes on property and stamp duty on assets at death.
Customs duties can be quite high for immigrants.
But Is Grappling With A Budget Deficit
Government debt to GDP increased from a low of 5.9 percent at the end of the 2007-08 fiscal year to around 30 percent by the end of 2012-13. Net Government debt now stands at BMD2bn and in 2013 the Government borrowed BMD800m to finance multiple anticipated years of deficits. The Government expects to borrow more in 2015.
The Government has resisted the temptation to introduce income tax to help plug the budget gap. However, some taxes have been increased in recent budgets. The 2015/16 Budget, announced in February 2015, included increases to the payroll tax, fuel duty, land tax on commercial properties, the corporate services tax and the Airport Departure Tax.
As well as proposing a number of tax hikes, Bermuda is seeking technical assistance from the International Monetary Fund's Caribbean Regional Technical Assistance Center to study measures that would broaden Bermuda's tax base, with a view to balancing the territory's finances within three years.
The Bermudian Government is, however, keen to avoid any fiscal measures which could endanger the international business sector as well as the jurisdiction's financial independence.
"The Government deficit and growing debt threatens our ability to fight for ourselves because if we lose the confidence of international credit markets we will likely have to revert to the UK for backing," warned Finance Minister Bob Roberts in his 2015/16 Budget address.
However, he went on to assert that: "This Government will do everything in its power to prevent that woeful day from happening. Therefore, we will have to redouble our efforts and determination to eliminate the Government deficit as soon as possible."
Bermuda Is Clean And Responsible
As Roberts went on to observe in his budget address, Bermuda "has had to work hard to differentiate itself from the dirty, shady offshore financial centres."
The Government has therefore cooperated with ongoing international regulatory and tax transparency initiatives.
In September 2013, the Government wrote to the UK Foreign and Commonwealth Office to request inclusion in the Multilateral Convention on Mutual Assistance in Tax Matters "at the earliest possible moment."
On December 19, 2013, Bermuda signed an intergovernmental agreement with the United States on the implementation of the Foreign Account Tax Compliance Act.
According to Richards, in November 2014 Bermuda had tax information exchange agreements (TIEAs) with 80 countries, including 41 TIEAs with 90 percent of the G-20, 76 percent of OECD countries, and 52 percent of EU member states.
However, Bermuda has bluntly refused to accept the need for a public register of beneficial ownership of companies registered in the jurisdiction, as is being advocated by the UK. The Government has said that it will only introduce such measures when the UK, US, and Canada do the same for their companies.
Bermuda Is Synonymous With Insurance
Bermuda is a significant player in the global insurance market. This is partly due to legislation which provides greater flexibility than that of most other jurisdictions.
On May 4, 2015, the Bermuda Monetary Authority released statistics showing the continued significance of the Bermuda (re)insurance marketplace and underlining its major role in the world's risk transfer industry.
According to these figures, the insurance sector recorded USD163bn in gross premiums in 2013 (the latest year for which complete data is available) an increase of 35.3 percent year on year. Overall, the market recorded aggregate total assets of USD607.6bn and held aggregate capital and surplus of USD191.6bn.
Bermuda's captives wrote USD32.9bn in gross premiums and reported total assets of USD125.4bn. Reported capital and surplus for Bermuda's captives was USD53.3bn.
"These statistics clearly demonstrate the market's continued resilience in the face of increased competition and a prevailing soft market," Swan said. "Bermuda's remains one of the world's most important insurance markets," said Craig Swan, the BMA's Managing Director, Supervision.
In 2014, licenses were granted to 89 new insurance entities, including 65 new insurers and 24 new intermediaries.
The most significant growth in 2014 was in the long-term (life insurance) sector. Growth in this area was supported by the decision of the National Association of Insurance Commissioners (NAIC) to grant conditional Qualified Jurisdiction (QJ) status to Bermuda effective on January 1, 2015.
The NAIC is the US standard-setting and regulatory support organization created and governed by the 50 US state insurance regulators, the District of Columbia, and five other US territories. Having QJ status allows reinsurers in Bermuda to reinsure US risk on a non-discriminatory basis and benefit from reduced collateral requirements.
In terms of the beneficial ownership of the new insurers, the US was far and away the most significant jurisdiction once again, with Bermuda and Europe second and third respectively. Two new insurers from Latin America and two captives from Canada were amongst the new registrants in 2014.
Alongside the addition of ten new long-term insurers, Bermuda registered 16 new captives, 11 new commercial insurers writing general business, and 28 Special Purpose Insurers.
Shelby Weldon, BMA Director of Licensing and Authorizations, said: "The 2014 registration activity continues to demonstrate Bermuda's global position as a leading alternative risk transfer marketplace. We remain the global leader in both captives and Insurance Linked Securities and our international reinsurance sector remains one of the world's top reinsurance markets."
Importantly, Bermuda is seeking equivalence with the European Union's "Solvency II" directive, which requires that the solvency regime applied to reinsurance activities of third country undertakings such as Bermuda is equivalent to that laid down in the Directive. In a paper released last December, the European Insurance and Occupational Pensions Authority endorsed key aspects of Bermuda's commercial (re)insurance regulatory regime as meeting the criteria of the Directive, with certain caveats. The paper marks a big step towards ensuring that Bermudan insurers and reinsurers retain access to EU markets when new harmonization rules come into effect in 2016.
Mutual Funds Are Also Big Business
Bermuda is well behind the Cayman Islands in terms of the size of its investment fund sector, but fund management is nevertheless a strong component of the finance industry, assisted by the existence of a stock exchange.
At the end of the third quarter of 2014, the total number of funds registered in Bermuda was 661, including 457 mutual funds, 40 umbrella funds, 65 segregated account companies, 62 unit trusts, and 47 umbrella trusts. The net asset value of these funds was just over USD175bn.
In March 2014, the BMA confirmed the signing of a memorandum of understanding (MoU) with Germany's financial regulator, the Federal Financial Supervisory Authority, in relation to the European Union's Alternative Investment Funds Managers Directive (AIFMD).
The MoU, the 27th accord concluded with the Authority under the AIFMD, provides for mutual assistance between supervising managers of alternative investment funds who operate on a cross-border basis in both jurisdictions.
Jeremy Cox, CEO of the Authority said: "Germany is an important market for Bermuda, and this MoU will ensure that Bermuda fund managers have the opportunity to participate in the German market with the appropriate level of supervisory oversight. Marking this milestone also serves to reinforce Bermuda's competitive position as a jurisdiction that can accommodate a full spectrum of fund related activity within an internationally recognized regulatory framework."
But The Banking Sector Is Small (And Perfectly Formed?)
International banks were conspicuous by their absence due to the Government's policy of excluding non-domestic banks; then HSBC was allowed to buy the Bank of Bermuda in 2003. However local banks provide adequate services, and there has been a substantial development of 'fringe' financing activities along with securities trading, and most recently a surge in Internet financial services.
The early decision of the Bermuda Government to exclude foreign banks may have owed more to self-interest than to fear of money-laundering or the OECD, but it turns out to have been very successful, leading not only to Bermuda's high reputation but to the establishment of strong, local banks, something that has eluded almost all other IOFCs. The unrestrained growth of the insurance and mutual fund sectors certainly doesn't seem to have been curtailed by any lack of banking variety. Indeed, the variety and quality of private banking services on offer has contributed strongly to the development of international business in and from Bermuda.
Four banks are currently licensed in Bermuda (May 2015). These include HSBC Bank Bermuda Limited, Bermuda Commercial Bank Limited, Clarien Bank Limited, and the Bank of N T Butterfield & Son Limited.
Trust Management Is Also Significant
Trust management has been a significant activity for Bermuda for more than fifty years. Originally the main sources of trust business were the UK, the USA and Canada, but more recently other parts of the world have become increasingly important, as understanding of the trust concept has spread more widely.
Successive tightenings of anti-avoidance legislation in the traditional markets have also tended to reduce volume. However, like other common law trust jurisdictions, Bermuda is tapping into new markets in Asia. For example, in 2012, Business Bermuda, the promotional agency for the island's financial services industry, used the opportunity of the recent annual Society of Trust and Estate Practitioners (STEP) Asia conference to build upon the territory's profile in Hong Kong.
Commenting following the visit, Cheryl Packwood, Chief Executive Officer of Business Bermuda, said: "Hong Kong is an important global player and a key partner for Bermuda, and this trip has been a huge success. In the last decade, more than 500 Asian companies have domiciled in Bermuda, which is increasingly becoming a destination for Asian companies looking to base in a jurisdiction with many advantages such as high quality regulation that also offers the ability to organize transnational investments between Asia and the United States or Europe."
Bermuda Offshore Company
The principle offshore company format used in Bermuda is the exempt company, which are formed under the Companies Act 1981 (as amended). This format provides exemption from the 60 percent local ownership requirement to a company which is does not engage in any activity on the island except with other exempt entities. Managing other exempt entities is also permitted, and, for mutual companies, so is the local distribution of their shares. Other activities may be permitted to exempt companies if a licence is granted by the Minister of Finance.
An exempt company must have two individuals resident in Bermuda, either as directors, or one as secretary and one as director, or one as secretary and one as 'permanent representative'.
Exempt companies pay annual fees based on their 'assessable' capital (authorised capital plus share premium account; or for a mutual company its authorised capital - a share premium account is not required).
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